Please note: the figures in the report below were published before the Government announced additional measures to protected mortgage holders on 23 June. These measures will likely reduce the number of mortgage repossessions over the coming 12 months.
UK mortgage holders just can’t catch a break at the moment. Gilt yields, which had been trending up since the start of the year, have risen sharply over the past month on the back of data showing high UK wage growth and two recent disappointing inflation releases. The latest figures showed core inflation rising to a more than 30-year high of 7.1% in a sign that second-round effects are poised to become the main driver of inflation in the months ahead. All of this has caused mortgage rates to climb, with the average two-year fix exceeding 6% earlier this week.
In a bid to convince the markets and the public that it is determined to get inflation back under control, the Bank’s Monetary Policy Committee decided to raise rates by 50 basis points in their June meeting, exceeding consensus expectations of a quarter basis point rise. The interest rate squeeze won’t be over anytime soon with the market-implied path for interest rates averaging ‘around 5.5%’ over the next three years.
As mortgage holders roll off their old, ‘cheap’ fixed deals and onto new contracts with much higher interest rates, they will face a substantial cut to disposable incomes. Previous Cebr research estimated the average increase in the annual cost for households who remortgage this year to stand at £3,900 with this rising to as much as £7,300 for those with a mortgage in the capital.
Will the increase in interest rates lead to a similarly large uptick in mortgage repossessions? Historically, periods of rapid interest rate rises have frequently led to housing market crashes and high numbers of repossessions. More than 200,000 homes were repossessed in the three years to 1993 as the housing market crashed. This compares to around 127,000 repossessions during the height of the financial crisis between 2008 and 2010.
More recently, the latest data by UK Finance show that in Q1 2023 repossessions rose by 42% on the quarter to 1,160. While the relative increase seems large, the overall level is still low as a result of pandemic support provided by the government and lenders.
We have modelled the potential increase in repossessions for the current rate hiking cycle under two scenarios. The baseline scenario sees just one further interest rate hike to 5.25% in August with rates falling gradually thereafter, reaching 3.75% by the end of 2024 and 3.0% by the end of 2025.
Under this scenario, our figures show that property repossessions will tick up as higher interest rates put pressure on mortgage holders in the coming quarters. Our model sees average quarterly repossessions rising from 2,230 in 2023 to 4,860 in 2024 and 6,000 in 2025. Over the three-year period, we expect just over 52,000 homes to be handed back to the banks.
However, under a more aggressive interest rate scenario, things could turn out even worse for mortgage holders. Should rates indeed rise above 6%, as currently implied by markets, the squeeze would be felt even more acutely, meaning more households would be unable to meet repayments and would eventually have to hand back the keys to their home. Our ‘high rates’ scenario assumes that the Bank of England meets current market expectations and raises rates as high as 6.25% by early 2024, with the bank rate still standing at 5.00% by the end of next year. Our model shows that this would lead to more than 9,400 additional repossessions between 2023 and 2025 compared to the baseline scenario, implying a total of 61,600 repossessions for the period. The difference would be largest in 2025 with the average quarterly repossessions standing 1,260 higher than under the base line scenario.
Table 1: Estimated annual mortgage repossessions, for baseline and high rate scenarios
Source: Bank of England, UK Finance, Cebr analysis
While the figures make for grim reading, they are still quite a way down from the previous squeezes seen during the 1990s housing market crash and following the financial crisis. This is partly due to the more stringent regulations which were put in place after the previous crises, assuring that borrowers need to pass a range of stress tests before they are approved. Moreover, UK housing wealth has increased substantially in recent years, meaning mortgage holders have a larger safety margin and are not as likely to fall into negative equity as was the case during the 1990s.
Nevertheless, as the Bank of England continues to fight inflation, the economy is entering unchartered territory. With interest rates raising so rapidly in such a short amount of time, it is not only mortgage holders but also the wider financial system that will come under strain. At the same time, the risk of recession, which had seemed to fade away in recent months, is now rising again which could lead to a more rapid increase in unemployment than currently expected. The difficult economic times look set to stay with us for some time to come.
 Ministry of Justice – Mortgage and Landlord Possession Statistics
Figure 1: Bank rate and quarterly repossessions, for baseline and high rate scenarios
Source: Bank of England, UK Finance, Cebr analysis
For more information, please contact:
Kay Daniel Neufeld, Director and Head of Forecasting and Thought Leadership
Email: email@example.com, Phone: 020 7324 2841
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.